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Alok Ind.: Equity dilution to lighten debt burden

Mar 23, 2009

Performance summary
  • Topline grows by 44% YoY in 9mFY09 on the back of higher sales of woven apparels and garments.
  • EBIDTA margins improve by nearly 2% for the quarter and by 1% for the nine month period on the back of lower input costs.
  • Exports grow by 24% YoY during the nine month period. 57% of exports to US and 18% to Europe in 9mFY09.
  • The company had 3% of its borrowings in the form of FCCBs at the end of December 2008 and long term debt to equity ratio of 2.2 times.
  • Net margins (excluding the extraordinary items) slip from 7.4% in 9mFY08 to 6.1% in 9mFY09.
  • To raise Rs 4.5 bn through rights issue in the ratio of 83:40 (at an issue price of Rs 11 per share). The record date for the same has been fixed as 25th of March 2009.

Standalone financials
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,507 8,164 48.2% 14,344 20,579 43.5%
Expenditure 4,160 6,019 44.7% 10,895 15,384 41.2%
Operating profit (EBDITA) 1,347 2,145 59.2% 3,449 5,195 50.6%
EBDITA margin (%) 24.5% 26.3% 24.0% 25.2%
Other income 8 5 -45.1% 45 19 -57.8%
Interest 295 701 137.6% 848 1,629 92.1%
Depreciation 434 704 62.2% 1,156 1,722 49.0%
Profit before tax 626 745 18.9% 1,490 1,863 25.0%
Extraordinary items** 56 (25) 404 (71)
Tax 194 244 25.8% 427 613 43.6%
Profit after tax/(loss) 488 476 1,467 1,179
Net profit margin (%) 8.9% 5.8% 10.2% 5.7%
No. of shares (m) 209.4 218.9
Diluted earnings per share (Rs)** 6.8
Price to earnings ratio (x) 1.7
(*On a trailing 12-month basis) **Extraordinary items refer to foreign exchange loss

What has driven performance in 3QFY09?
  • Despite the economic slump, Alok Industries witnessed appreciable growth in domestic sales (60% YoY) as well as exports (23% YoY) during 9mFY09. This was particularly due to the change in product mix in apparels and higher realisation from garments. The woven apparels, which continue to be the mainstay in Alok’s business, showed very appreciable momentum in growth while the proportion of home textiles declined from 21% in 9mFY08 to 17% in 9mFY09.

    Sales breakup
    (%) of sales 9mFY08 9mFY09 % change
    Yarn 1,075 947 -11.9%
    % sales 7.5% 4.6%
    Knit apparels 942 1,120 18.9%
    % sales 6.6% 5.4%
    Woven apparels 5,032 9,237 83.6%
    % sales 35.1% 44.9%
    Home textiles 2,954 3,544 20.0%
    % sales 20.6% 17.2%
    Garments 472 887 87.9%
    % sales 3.3% 4.3%
    Retail 38 67 76.3%
    % sales 0.3% 0.3%

  • While volumes in the branded garment space are not very enthusing, the company has not compromised on the realisations on the same, seeking its positioning in the premium category. The proportion of garments in overall sales increased marginally from 3.3% in 9mFY08 to 4.3% in 9mFY09. We have been conservative in our future growth estimations in this segment considering the pressure on retailing costs.

  • High debt to equity ratio and steep interest costs have been the bane of contention for the company over the past few months and have eaten into its net margins. With the impending rights issue and conversion of warrants into equity shares the company is expected to have sufficient funds to partly relieve itself of its high leverage. The total debt to equity ratio (net of cash) stood at 3.0 times at the end of December 2008.

  • Despite, drop in demand (10 to 15%) and possibility of having significantly higher surplus cotton inventory for the country, the prices of cotton, though lower than last year, are still ruling at higher levels. Alok Industries has entered into contracts for procurement of organic cotton.

  • Although the management continues to remain bullish on the long term revenue prospects of its retailing venture ‘Homes & Apparels’, retailers across the country have witnessed a substantial drop in footfalls (upto 20%) and large inventory pile up. At present, Alok has 50 retail outlets plans to take it up to 1,000 stores in the next five years, spending about Rs 2.5 m on setting up each store and garnering revenue of Rs 4 m per store per annum.

What to expect?
At the current price of Rs 15, the stock is trading at a multiple of 1.7 times trailing 12-month earnings. Despite the fact that the continued volatility in rupee-dollar rate will pose some risks in the medium term, the policy of servicing the key markets with value added products and focused marketing of brands would yield positive results. The company is targeting to improve its net margins by paying off its debt through equity dilution. We shall soon put up our updated view on the stock.

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